Stock Name: SPSETIA
Company Name: SP SETIA BHD
Research House: INTER PACIFIC

S P Setia Bhd
(Oct 6, RM4.80)
Recommend neutral at RM4.50 with target price of RM4.94: S P Setia's unbilled sales stand at about RM1.8 billion, about 1.4 times the revenue contribution from the property segment in FY09. We like S P Setia because: (i) its diversified property developments which include overseas ventures; and (ii) its net gearing ratio of 0.29 times justifies its financial strength.

A comfortable gearing ratio will support future landbanking as well as possible participation in the government's public-private partnership projects. We recommend 'neutral' with our target price at RM4.94, which is a 5% premium over our RNAV-based valuation. We believed S P Setia's position as one of the superior brands among developers warrants such a premium.

Strong sales momentum was sustained in the 10th month of FY10, with RM1.95 billion sales achieved as at Aug 31, 2010. Cumulative sales of RM1.95 billion exceeded FY09 full-year sales of RM1.65 billion by 18%. Projects in the central region, which comprise Setia Alam, Setia Eco Park, Setia Sky Residence, and Setia Walk, contributed to 67% of total sales. The southern region, which mainly concentrated on Johor projects, and northern region contributed 27% and 7% respectively. There are unlikely to be new launches before the financial year ends in October. Nonetheless, we believe S P Setia is well in line to achieve its full-year sales target of RM2 billion via the unsold units of existing launches. We estimate that the unsold launched units could generate sales of about RM230 million.

During the economic downturn in CY09, S P Setia embarked on innovative measures to capture a market share in the luxury high-rise and integrated commercial sector and further consolidation in the landed residential segment via promotional campaigns such as the 5:95 campaign.

On the flip side, revenue sustained in FY09 was at the expense of margin erosion. Normalised net earnings year-to-date in 3QFY10 were about 12.2%, which has shown no sign of improvement since FY09. ''

Moving forward into FY11, we expect its net earnings to improve, underpinned by higher property prices in FY10 following the expiration of the 5:95 campaign which will restore product margins. We have taken this adjustment into account in our forecast and margins. ' Inter-Pacific Research, Oct 6


This article appeared in The Edge Financial Daily, October 7, 2010.